Citigroup said yesterday that federal regulators
had warned the bank that an investigation of its asset management unit
could result in an enforcement action against the executive who ran the
division until this week.
The Securities and Exchange Commission has sent a Wells notice - a
letter warning that an individual or company will probably face a civil
complaint from the commission - to Thomas W. Jones, who had run Citigroup
asset management, the fund management arm of the bank, since 1998.
The notice caps a difficult week for Charles O. Prince, Citigroup's
chief executive, who has been taking pains to prove to regulators as well
as to investors that Citigroup, a mammoth financial institution with
offices and businesses that span the globe, can at the same time run a
clean ship.
On Wednesday, Mr. Jones and two other senior bank executives were
forced to resign by Mr. Prince after an internal review concluded that
they were responsible for a breakdown in oversight at Citigroup's private
banking operations in Japan.
In September, Japanese regulators barred Citigroup's private banking
business from operating in the country, citing inadequate internal
controls to prevent fraudulent trades and money laundering.
Robert B. Willumstad, the president of Citigroup, said yesterday in an
e-mail message sent to employees that neither the "Wells notice nor the
underlying investigation had anything to do with Tom's leaving the
company." Mr. Willumstad added that Citigroup had informed regulators in
November 2003 of the infractions, which included an inappropriate and
undisclosed payment made to Citigroup asset management by an outside
vendor.
For Mr. Jones, a respected executive with over 20 years of experience
working at the top levels of financial services firms, the notice is a
troubling epilogue to a long career at Citigroup.
His path to the upper reaches of Citigroup's executive suite was an
unusual one. As a student at Cornell in 1969, Mr. Jones led an armed
takeover of the student union building to protest the university's
policies toward its black students as well as the Vietnam War, an action
that led to his being featured in Newsweek.
He eventually graduated from Cornell, and after top posts at John
Hancock, TIAA-CREF and Salomon Brothers, he joined Citigroup. At the time
of his dismissal, Mr. Jones was responsible for $490 billion under
management at Citigroup asset management.
Mr. Jones could not be reached for comment.
On the surface, the S.E.C. investigation would seem to pale in
comparison to the other regulatory run-ins that Citigroup has encountered
over the last three years. All the same, it raises some uncomfortable
questions with regard to the quality of executive decision making at the
top tier of Citigroup's business units.
Between 1997 and 1999, Mr. Jones decided to bring in house the bank's
transfer agency operations, a business that documents the ownership of
securities within the firm's mutual funds.
The initiative was aimed at reducing fund fees, a goal Citigroup
executives say was met.
Subsequently, Mr. Jones and other executives within the unit decided to
pass on a portion of the agency business to an outside vendor, the First Data Corporation. The agreement with First
Data included a revenue guarantee of $16 million that was paid to
Citigroup asset management but that was not passed on to its mutual funds
as it should have been. Nor were the payments ever disclosed.
Citigroup is repaying the amount to its funds with interest although it
has offered no explanation as to why it received such a revenue
guarantee.
While Citigroup itself received a notice in July, securities lawyers
said yesterday that the payment and the nondisclosure were at the heart of
the S.E.C. investigation.
"The fact that only individuals are being charged makes it more likely
that it's the improper payment and not back-office record-keeping
violations, that the S.E.C. is investigating," said Thomas Dewey, a former
S.E.C. lawyer at the law firm of Dewey Pegno & Kramarsky.
A lower-level Citigroup executive working in its compliance division
and a former employee who worked in the bank's back office also received
notices. Citigroup declined to reveal their names.
The commission, as is its practice, declined to comment on the
investigation.
But, while the sum of money is indeed tiny for an institution that
earned $17 billion last year, the investigation highlights the two issues
that analysts say continue to plague the bank.
One is the enormous size and breadth of its businesses, which allows
for ethical and regulatory lapses on the part of employees to slip through
the cracks. Second is the "meet your numbers mentality" that has long been
the hallmark philosophy of Sanford I. Weill, the bank's chairman. Analysts
and Citigroup employees say that mind-set puts undue pressure on
executives to cut corners as they search for extra pennies to meet their
financial targets.
With the company's stock price lagging, Mr. Prince is now taking steps
to address these points.
On Monday, he will hold a news conference in Japan to explain how the
bank aims to improve its operations there. Yesterday, Citigroup submitted
a plan to Japanese regulators, outlining the steps it will take to
strengthen internal oversight of its Japanese operations.
The plan includes measures to strengthen the management structure of
the Japanese operation, the bank said. Japanese regulators from the
Financial Services Agency have said they believe that a main reason the
violations occurred was that private bankers in Tokyo reported directly to
executives in New York, so there was little oversight of daily operations
on the ground in Japan.
